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What is an NFP?

Published by Jonathon Jachura

Reviewed by Bowen Khong, ACCA

The Non Farm Payrolls, also known as NFP fundamental economic indicator, is released in the U.S. every month. The report has a well-deserved reputation as being among the most focused and crucial pieces of information that FOREX traders use. 

The U.S. BLS (Bureau of Labor Statistics) publishes the NFP report on the first Friday of every month. 

The report influences the value or rate of the dollar against many other currencies, such as GBP, and provides NFP traders with frequent rate swings.

What is the Non-Farm Payroll (NFP) Report?

The Non-Farm Payroll (NFP) report is the monthly, national payroll report for all workers or employees in the U.S. who don’t work on a farm.  

Before trading on any news release, it is vital to know and understand what the NFP means and how to analyze it. While the term non-farm payroll might sound fancy or complicated, it is actually quite simple and precise. 

Economic analysts and investors use this report as an important indicator of where the U.S. economy may be heading. 

For example, it is usually considered that the U.S. economy is expanding when NFP numbers are increasing. In contrast, the economy is contracting when these numbers are falling.

NFP Details

Almost all economists agree the NFP (non-farm payroll) figure is a crucial economic indicator for the U.S. economy. 

And the figure represents the number of total jobs added, excluding government employees, farm employees, private household employees as well as employees of various nonprofit organizations. 

As farm workers and employees are seasonal employees who usually earn money on the basis of the time of year, the U.S. government does not include these employees in this report. Also, the non-farm payroll (NFP) report includes unemployment numbers and figures, such as the unemployment rate. 

As a result, it is a huge market mover, particularly during times of recession when everybody is interested in the unemployment report as one of the indicators for the economic and financial recovery of the country. 

That is why the NFP has always been deemed a measure of overall economic health.  

In addition to NFP, two of the less watched yet crucial metrics are the labor-force-participation rate and employment-to-population ratio. The labor-force-participation rate measures how many individuals are working compared to those who could be working.

On the other hand, the employment-to-population ratio measures how many individuals are working relative to the total population. 

Currency Pairs

Currency pairs are also directly impacted by NFP data releases. Currency pairs (particularly those that involve the U.S. dollar) are one of the most anticipated and vital economic news events of the month. Usually, they see significant price fluctuations in the minutes or hours after this data is released. 

As a result, this makes it an excellent opportunity for many day traders with a sound and prudent strategy to take full advantage of the currency’s volatility.

And the EUR/USD is one of the most heavily and frequently traded currency pairs in the market, usually providing ample price movement and the smallest spread for making trades. 

The NFP Release Calendar 

In the U.S., the highly influential and crucial NFP data is typically expressed every month with respect to the number of individuals subtracted or added to those employed in various non-farm-related jobs in the country.

The initial figures for this crucial indicator release on the first Friday of every month – along with revisions to the last month’s data and the U.S. unemployment rate – by the BLS of the U.S. Department of Labor.

How to Read and Interpret the NFP Figures

The best and most effective way to read this report is over time with previous reports. This is because it allows the first estimates and numbers to finalize and any revisions to occur. In most cases, it is better to track the trend of the NFP numbers than the figures themselves. 

Also, more importantly, you should track the trend of the 12-month job gains (average) in the market. This is because the 12-month average is the best measure of various labor market trends, and you can use it to judge the significance of all the other data in the report.

Similar to other reports and indicators, a declining unemployment rate in the U.S. (better than predicted) could support the U.S. dollar. 

On the other hand, an increasing unemployment rate in the U.S. (lower than anticipated) may send the U.S. dollar down because Fed easing bets increase.  

And if unemployment tracks lower or wages track higher, it’s a good sign for the country’s overall economic health. 

However, the main problem is that in a given month, either of these two figures may provide a false signal, and you cannot confirm it until the following NFP report is released.

How NFP Trading Works

NFP trading is possible since the news release nearly guarantees you a tradable market move. While the NFP report certainly has a knock-on impact on almost every currency, the GBP/USD is the most popular pair among Forex traders.

And if the NFP figures are below economist estimates, investors and traders will likely predict a weakening dollar, selling the currency in the process. If wages and employment levels are high, this usually indicates a strengthening U.S. economy. 

As a result, investors will purchase the dollar. And that is not all; the release of the NFP impacts the price of gold, in particular when trading against the USD.

How the NFP Report Affects Forex

There is no denying that the non-farm payroll (NFP) report triggers one of the largest and most consistent rate movements linked to any news update or announcement in the Forex market. 

This is why many analysts, funds, traders, investors, and speculators anticipate and predict the NFP number and the directional movement it will cause. 

Employment is also one of the crucial indicators for the Federal Reserve Bank. This is why when unemployment is high, policymakers prefer an expansionary monetary policy. And the primary goal of an expansionary policy is increasing economic output as well as employment in the economy. 

With so many different authorities and parties watching this report and interpreting it, even if the number is in line with expert estimates, it is likely to cause massive rate swings.

Trading the NFP Report

There are two main ways of trading the non-farm payrolls report: the near-term news and long-term trend. In most cases, the most effective and prudent way of using the NFP report for trading is from a long-term perspective. 

In this case, you use the NFP in order to confirm or determine the trend, various changes in trend, and main turning points. For example, if the NFP is positively trending and showing multiple signs of strength, the fundamental market trend is considered bullish. 

And in this case, it’s best to follow just bullish signals when these signals are present on the price chart. Pullbacks and price corrections to support levels are usually opportune entry points for long-term style trades. 

How can you find a position to trade the NFP report? As a trader, you need to establish criteria to enter and exit and the position size you would like to trade. An excellent example of finding the trade setup may be to use thirty pips. 

It isn’t unheard of or unusual for the EUR/USD to move thirty pips within the first couple of minutes after the report’s release. And the more prominent this initial move, the better it usually is to establish the pair’s direction.

Also, once the initial big move occurs, there is usually a price pullback, which tends to signal an entry point. 

If you use one-minute price bars, you can draw a trend line easily from the high point of the initial move to the high point of the price pullback 1-minute bars (in case the initial move was up). You can buy when the price finally breaks above the trend line. 

On the flip side, the other popular method of trading the NFP report is called the short-term news. It involves examining whether the NFP is better or worse than expected or does the NFP refutes or confirms market expectations.  

However, there is a problem with this method; the NFP does not always get the market sufficiently wound up to generate a move and, due to its flaws, seldom produces a figure that’s truly market moving. So, as a Forex trader, it is difficult to predict movements for a monetary gain.

Trading the NFP Report for the Long Term

If you want to trade NFP in the long term, you could analyze the Non-Farm Payrolls report and take a position based mainly on a fundamental approach intended and suitable for the medium to long term. 

As a result, this approach is reserved and ideal for Forex swing traders as well as investors. And knowledge of various economic fundamentals is necessary to analyze the economic context and then make the right decision when investing.

NFP Trading Hours

The NFP report is released on the first Friday every month at 08:30 EST. And the Forex market is open 24 hours per day during weekdays. This means that, as a trader, you can start opening positions soon after the release. 

And the overall impacts of the NFP release tend to last around 4 to 5 hours. However, remember that the market closes at 16:00 EST sharp on Fridays for the weekend close. This is why traders will have to be completed by then in order to avoid an overnight holding fee. 

Also, the week of the NFP report release is typically calm with minor price changes. This is because most traders in the market are waiting for the release. And trading during a typical NFP week could be very profitable if you’re a day trader looking to make the most of slight price variations. 

Is Trading NFP Reports for Everyone?

It is no secret that news reports, such as NFP, are exciting for traders and brokers. And with the weekly and daily economic news posted on several broker websites, many new traders in the market simply assume that news reports, such as NFP, are something they should trade. 

There are indeed many benefits and advantages to trading the NFP report and other news reports. For example, they will help you structure your trading schedule while offering you the chance to profit from massive market moves. 

However, there are also some drawbacks to trading news reports. One of the main drawbacks is the high unpredictability level associated with news reports. We all know that reports cause spikes, whipsaws, and other choppy conditions. 

While waiting for the first bar to close may help keep you from losing money, it does not necessarily mean that trading NFP reports are not still quite tricky and challenging. 

Final Thoughts 

The NFP report is an essential monthly report by the U.S. government. It strongly influences and affects the price of the U.S. Dollar, other currencies, and gold. NFP trading is beneficial as it can provide many benefits to traders looking to profit from volatile price movements in the market. 

However, it can be complicated and tricky to determine or predict the direction of the price before the move has happened. While NFP trading can be very lucrative, you need to have a clear and comprehensive strategy as well as keep a cool head.

Jonathon Jachura
Jonathon Jachura
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